Your Money.

Becoming A Conscientious Investor

Mutual Funds That Screen For Socially Responsible Companies Are Gaining In Popularity

December 01, 1999|By Jennifer Hieger, Knight-Ridder/Tribune.

A generation ago, companies all but ignored the Pax World Fund.

When Pax researchers called with questions about a firm's environmental record, company officials were indignant, confused or both. That sort of information is proprietary, they said. Besides, why would investors care?

Today, the story is very different. Some companies that aren't included in Pax World, launched in 1971 as the nation's first socially responsible mutual fund, now call to ask why they were left out.

Socially responsible investing has taken off. Across the country, many investors are asking for more than strong returns. They want companies with a conscience.

Assets in socially responsible mutual funds now total $8.5 billion, up 252 percent from five years ago. That is a big increase, though the sector's growth was matched by the booming mutual fund market in general, according to Morningstar, a Chicago company that tracks mutual funds.

Socially responsible funds represent a small but noticeable portion of the mutual fund universe, where assets in stock funds are approaching the $3 trillion mark.

Investing with an eye to something other than the bottom line is a strange concept for Wall Street, where nothing but buying low and selling high is gospel.

But socially responsible investing is sticking.

Businessman James Lee began questioning his investment choices five years ago, after reading articles about the depletion of the rain forests in South America and the prevalence of sweatshops in Asia. He now directs his money toward companies with solid records.

"I want companies to be as responsible as they can," said Lee, who owns a heating and sound-control company. "They should make a profit, of course. That's the American way. But they shouldn't hurt anybody doing it."

Lee is happy with his returns.

"I could maybe make 1 percent or 2 percent more with other companies, but it's not worth it," he said.

Mutual funds are the easiest route to socially responsible investing, but not the most popular. More money is invested by socially focused investors through their individual stock portfolios.

Smith Barney, for example, manages $1.8 billion in socially screened assets, and more than half of that--$1.1 billion to $1.2 billion--is in individual accounts. In the last year, the value of socially screened accounts under the firm's management soared nearly 70 percent.

Socially responsible investing does have drawbacks. Mutual funds that run companies through social as well as financial screens before deciding what to buy tend to be more expensive, because of the additional research. The funds also invest heavily in the technology sector, while avoiding older-school value stocks. Technology companies are attractive because they pass most social screens; they don't pollute and often have progressive workplace policies.

That's been fine in recent years. But if technology companies fall out of favor, socially responsible investors could suffer.

For some companies, the movement is a headache. Walt Disney Co., in particular, has been caught between competing agendas.

The Domini Social Equity Fund invests in Disney, though it has urged the firm to step up its efforts to prevent child labor and other workplace abuses at manufacturers who make Disney products. Domini praises the company for extending health benefits to the partners of gay employees, promoting affordable housing and supporting inner-city youth athletic programs.

But one investor's virtue is another's vice. The socially responsible Catholic Values Investment Trust refuses to invest in Disney because, among other problems, it offers health coverage to the partners of gay employees.

"Nothing is black and white in the business of social investing," said Walter R. Miller, a trust manager in Bridgeport, Conn.

Launched in 1990, the Domini 400 Social Index tracks the performance of 400 large U.S. companies that have cleared several social screens. The companies can't, for example, make any money from the production of alcohol or tobacco. The fund tries instead to include companies with strong records of fostering workplace diversity and protecting the environment.

The index was established to determine how such companies stacked up against the S&P 500.

Of the two, Domini has been a slightly better bet. A hundred dollars invested in the Domini index in 1990 now is worth $591. The same investment in the S&P 500 Index is up to $504.

The numbers don't lie, said Peter Kinder, president of Kinder, Lydenberg, Domini & Co., the Boston-based company that created the index.

"These people are investors, first and foremost. They aren't coming to socially responsible investing because they think it's a charity," Kinder said.

Despite such success stories, some local advocates find social investing a tough sell.

Jocelyn Earnhart, a financial planner in Laguna Beach, Calif., encourages her clients to invest in accordance with their beliefs. But only a handful do so.

"The immediate response is, `I just need to make money,' " Earnhart said.

Such an attitude is financially flawed, she believes. Companies that don't pollute, for example, will deliver better returns than companies that do, because they won't be saddled with lawsuits down the road, Earnhart said.